The Changing of the Guard at Mof the Criteria Used in Selecting Finance Ministers Have Developed a Distinctly Partisan Flavour in Pakistan
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29th April, 2019 The changing of the guard at MoF The criteria used in selecting finance ministers have developed a distinctly partisan flavour in Pakistan. All three major national political parties that have formed a government at the centre during the past eleven years - Pakistan Tehreek-e-Insaaf (PTI), Pakistan Muslim league-Nawaz (PML-N) and Pakistan People's Party (PPP) - have appointed finance ministers based on their compulsions dictated from within the party ranks, from the country's institutional setup and/or personal compulsions. The PPP, since the time Benazir Bhutto became its chairperson, has not given due attention to encouraging a party loyalist to acquire appropriate academic credentials and relevant experience to become eligible for the finance portfolio. This accounts for Asif Ali Zardari's agreement to give the powerful finance portfolio to PML-N during the short lived coalition between the two parties in 2008. After the resignation of the PML-N federal ministers, Zardari gave the portfolio (acting) to a long time party loyalist Naveed Qamar (15 May to 13 September 2008), followed by Shaukat Tarin who resigned in February 2010, and was replaced with Dr Hafeez Sheikh who retained the portfolio for three years. Sheikh's resignation before the PPP's tenure ended was attributed to President Zardari pledging to support his candidacy as the caretaker prime minister, a pledge that he failed to follow through. The Finance Ministry was led by Salim Mandviwalla, a party loyalist, from 19 February till the end of the PPP tenure. Thus for four and a half years of its five-year tenure the PPP relied mainly on two 'technocrats' who were not ideologically committed party members - a selection based on the flawed assumption that economic policies can be formulated and implemented premised entirely on the state of the economy with political compulsions of little relevance. Irrespective of whoever led the finance ministry Asif Ali Zardari reportedly gave explicit instructions to his finance ministers on policy matters with political implications and/or relating to his close family/friends - he also gave instructions to State Bank governors widely believed to be the reason why there were four governors between 2008-13. Nawaz Sharif from June 2013 to end July 2017 (when the Panama Papers verdict came against him and he became ineligible to hold office) gave Ishaq Dar carte blanche to undertake any and all measures relating to the economy as well as in other important matters that led to Dar being referred to as the Deputy Prime Minister. Dar, an accountant by profession and a self-proclaimed economist, implemented policies that are without doubt a major contributory factor to the current economic impasse, and include: (i) heavy reliance on external borrowing which he rationalized by stating that interest rates on foreign loans were lower than domestic rates. This required him to keep the rupee value constant through market interventions made possible through foreign exchange reserves acquired by borrowing from multilaterals, bilaterals, commercial loans and through debt equity (at double the rates prevalent abroad); (ii) the strong rupee vis a vis our competitors currency led to a decline in exports, imports became more attractive and the trade deficit ballooned. Dar criticized Miftah Ismail's decision to allow the rupee to depreciate on IMF mission's recommendation in December 2018 but failed to take into account the steady decline in foreign exchange reserves due to the drying up of loans once the IMF programme was completed in September 2016 - a decline that severely limits the State Bank's capacity to prop up the rupee to this day; and (iii) his two amnesty schemes as well as his reluctance to proactively proceed against tax evaders and avoiders in spite of signing a number of international agreements that allowed access to information on assets held abroad by Pakistanis no doubt had a role to play in our being placed on the grey list by the Financial Action Task Force with implications on foreign investment inflows. Asad Umar, a long time PTI loyalist, was faced with the extremely challenging task of an unsustainably historically high budget deficit (projected at over 6 percent by caretaker finance minister in July 2018) as well as current account deficit (over 18 billion dollars) when he took over as the finance minister. He allowed the budget deficit to balloon further (current conservative estimates place the deficit at over 7.5 Page 1 of 2 percent in the current year) but dealt with the current account deficit with visible input from the Prime Minister in procuring loans from "friendly countries" to the tune of around 8.5 billion dollars (and an additional 3 billion dollar deferred oil payment facility from Saudi Arabia). However the repayments on loans and equity debt incurred during Dar's tenure implies around 10 to 12 billion dollars next year (not taking account of the loan from friendly countries as there is some hope that it may be rolled over for another year). There is considerable evidence that Prime Minister Khan has a hands-on approach to economic policymaking, even more so than President Zardari, and he constantly provides input into key economic decisions particularly relating to going on a Fund programme or not - the reason behind the delay in negotiating the package. To date, exports have risen by a marginal amount in the first 10 months of the current year in comparison to the year before - by 0.2 percent, imports declined by around 3.5 billion dollars during the past 9 to 10 months (likely to increase as and when the second phase of China Pakistan Economic Corridor projects commence) and remittances increased by 2 billion dollars during the first ten months of the current year compared to the previous year. In other words, the current account deficit should have shrunk by less than 6 billion dollars in the current year - still not sufficient to give the option to Pakistan not to go on an IMF programme. Asad Umar's replacement, Dr Hafeez Shaikh, is generating considerable controversy with regard to his capacity to take the economy out of the Intensive Care Unit (to borrow Umar's terminology) - a concern premised not on his academic credentials and experience, which are impressive, but on his performance during his previous tenure as finance minister marked by (i) backing off from economically critical decisions if instructed by the chief executive/decision maker, and (ii) data manipulation not with a stroke of the pen (as was done by Shaukat Aziz and Ishaq Dar) which is fairly easy for an economist to spot and challenge but through reducing the weightage of food by 6 percent in calculating the rate of inflation and reducing the rate by 12 percent in one year. Equally if not more importantly Dr Sheikh's performance would be affected by expected interventions by Prime Minister Khan especially on matters he feels strongly about, particularly with respect to IMF conditions that may include: (i) a further raise in utility rates to contain the energy sector circular debt; (ii) a reduction in the budget deficit as a percentage of GDP which may imply a reduction in the allocation on the Prime Minister's signature programmes for example the Ehsaas programme and the Sehat card; (iii) negotiating a voluntary decrease in allocations for the major recipients of current expenditure failing which insisting on reducing development expenditure with negative implications on growth; (iv) insisting on raising revenue from next fiscal year that may imply raising existing taxes that are unfair and inequitable while deferring time consuming but necessary tax reforms; and (v) negotiating successfully with the provinces on a new National Finance Commission award with the objective of raising the Centre's share in the divisible pool. This would be possible only through a consensus with all provincial governments which appears unlikely given the attacks on members of the opposition. It is unlikely that Dr Shaikh's previous strategy to delay decisions on instructions received by setting up a committee would be acceptable to Prime Minister Khan. One would hope that the Prime Minister allows him to take unpopular but economically necessary decisions given the state of the economy and, once the economy begins to turn around, to then replace him with a party loyalist. However that appears unlikely. ANJUM IBRAHIM Page 2 of 2 .